Household debt continues to swell, leaving Canadians more vulnerable to rising interest rates, but asset levels are rising, too.

Statistics Canada reported Monday that household debt, assets, and net worth all continued to increase in the third quarter.

On a per-capita basis, national net worth reached $183,500 in the third quarter, up from $182,800 in the previous quarter

Liabilities grew by 1.7% in the quarter to $1.5 trillion. RBC Economics points out that this was driven by a $17 billion increase in mortgage debt.

However, RBC also notes that liabilities grew at a slower rate that both assets and net worth, pushing the household debt-to-asset and debt-to-net worth ratios down from the all-time highs seen in the previous quarter to 19.7% and 24.6%, respectively.

Household net worth grew 2.7%, or $162 billion, to $6.1 trillion, following a 0.5% decline in the second quarter. “The increase pushes Canadians’ net worth above the pre-recession high seen in the second quarter of 2008, indicating that households have now fully recovered the cumulative $552 billion of net worth that they lost during the economic downturn,” RBC says.

“The improvement in household balance sheets reflected strength in equity markets that pushed the S&P/TSX composite index up 9.5% in the third quarter and led the market value of household financial assets (which include equities, mutual funds and pension assets) to surge by 3.7%,” RBC says, adding that continued strength in the housing market also helped push the value of non-financial assets up by 1.1% compared to the previous quarter.

“While household net worth continues to improve, it is growing at half the pace experienced in the three years prior to the recession,” observes TD Economics. “All the signs are pointing to a continued moderation in the rate at which households can accumulate assets. Unless households cool their pace of debt accumulation significantly in the near-term, the ability to grow their net worth will be constrained by the level of indebtedness.”

RBC notes that the household debt-to-personal disposable income ratio rose to a new record high of 149.9% from 145.2% in the second quarter.

For now, debt “remains quite affordable” for most households, TD says, because interest rates have been so low over the last two years. However, it notes that as rates rise and “households have to devote a greater share of their income to their monthly debt payments, bolstering their asset position through increasing savings will be a bit more of a challenge in the future, and liability growth is likely to continue to outpace asset growth for some time, weighing on net worth growth.”

RBC says that it expects household debt growth to moderate during 2011 reflecting a slowing in housing market activity, yet, it says, “these historically high household-debt burdens will weigh on consumers and likely limit the pace of growth in consumer spending next year.”

IE